A construction company signs two separate written agreements with the same customer on the same day: one for site preparation and one for building a warehouse on the same site. The agreements were negotiated together as a single commercial package, and the price of the site-preparation agreement was set below its standalone selling price specifically because the customer also signed the warehouse agreement. Under IFRS 15, how should the company treat these two agreements?
- Combine the two contracts and account for them as a single contract, because they were negotiated as a package with a single commercial objective and the consideration in one depends on the price of the other
- Account for them entirely separately, because IFRS 15 only permits combining contracts that are signed with different customers
- Combine them only if the customer requests combined invoicing, since invoicing practice is what determines whether contracts are treated as one arrangement
- Account for them separately unless they are physically contained in a single signed document, since the number of signed documents determines whether contracts must be combined
Why A? And why not the others?
Correct answer: A. Combine the two contracts and account for them as a single contract, because they were negotiated as a package with a single commercial objective and the consideration in one depends on the price of the other
IFRS 15 paragraph 17 requires an entity to combine two or more contracts entered into at or near the same time with the same customer, and account for them as a single contract, if any one of three conditions is met: the contracts were negotiated as a package with a single commercial objective; the consideration in one contract depends on the price or performance of the other; or the goods or services promised form a single performance obligation. Here two of those conditions are present, so combination is required. The option requiring different customers has the rule backwards — combination applies specifically to contracts with the same customer (or related parties of that customer), not different ones. The option tying combination to invoicing practice is wrong because how the entity chooses to invoice is an administrative matter that plays no role in the paragraph 17 test. The option tying combination to the number of physically signed documents is wrong because IFRS 15 looks to the substance of how the arrangements were negotiated and priced, not to their legal or physical form.
Source: IFRS 15 Revenue from Contracts with Customers, paragraph 17 (combination of contracts)